Is The Fed Trying To Create A "Bond Run" Panic? Yes... In Its Own Words

One of the most significant, if underrpeported stories of the week, was the announcement from Monday that in order to "prevent" bank runs, the Fed is preparing to impose "exit fee" gates on bond funds, in what, the official narrative goes, is an attempt to prevent a panicked rush for the exits. Of course, this is diametrically opposite of what the truth is.

This is what wesaid: "it goes without saying that "discouraging investors" from withdrawing funds is the last thing on the Fed's mind, which knows very well that when it comes to investor behavior all that matters is how the Fed's future intentions are discounted. And with this unprecedented step, the Fed is sending a very clear message: it may be next year, or next month, or next week, but quite soon you, dear retail bond-fund investor, will be gated and will be unable to pull your money.... what is the obvious desired outcome, at least by the Fed? Why a wholesale panic withdrawal from bond funds now, while the gates are still open, and since those trillions in bond funds have to be allocated somewhere, where will they go but... stock funds."

But wait, this would mean that instead of attempting to prevent a rush for the exits, the Fed is in fact doing the opposite, and is seeking to force investors to sell those sticky bonds they are holding on to and destroying the propaganda of a recovery (remember: you can't pitch a stable inflation-driven recovery fable when the 10Y is trading at 2.50% in the process launching the very run for the exits it is supposedly trying to avoid.

Pure conspiracy theory right?

Well, maybe. But that doesn't explain why someone else who agrees with our assessment is none other than... the Fed?

Our paper is the first to show that the possibility of suspending convertibility, including the imposition of gates or fees for redemptions, can create runs that would not otherwise occur. This contrasts with the existing literature, which focuses on whether suspension of convertibility can prevent runs. In other words, we show that rather than being part of the solution, redemption fees and gates can be part of the problem.

more:

... we show that there can be preemptive runs that occur only because an intermediary has the ability to impose "standby" (liquidity-contingent) gates or fees. Second, we show that for an intermediary that maximizes the expected utility of its own investors, imposing a gate or fee can be ex-post optimal. Hence, for an intermediary that can restrict redemptions in a crisis, a policy of not imposing such restrictions may be time-inconsistent. The financial intermediary might like to commit not to restrict redemptions, so that preemptive runs would not occur. Absent a means of ensuring commitment, however, the intermediary will find it optimal to suspend, confirming the beliefs of informed investors who withdrew preemptively.

Stated far more simply: the mere prospect of gating creates a self-fulfilling prophecy that results in the very bank run the gate was designed to prevent.

One can be sure that the same Fed, which is proposing "exit fee" gates is quite aware of this paper's conclusions. In fact, one can be certain that the Fed is imposing said gates precisely due to the findings of this paper.

In other words, the Federal Reserve, tasked with preserving financial stability, because not even the Fed pretends to be in the inflation and unemployment dual-mandate business any more - it is all about the "not a bubble" valuation of the S&P 500 - is actively seeking to create a bond run panic!

We wonder just which part of the Fed's "financial stability mandate" covers the Fed's attempts to spark a bond sell off.

Ironically, subversive intentions aside, as usually happens with the Fed when the intended theoretical outcome comes crashing down in the real world, an attempt to created a "controlled" panic, limited solely to bonds may very well backfire and result in a paniced withdrawal of other asset classes, including the most precious one of all to the Fed - equities.

Our results have broader policy signicance. Rules that provide intermediaries, such as MMFs, the ability to restrict redemptions when liquidity falls short may threaten financial stability by setting up the possibility of preemptive runs. Much of the wider policy signicance of that risk is beyond the scope of this paper, since our model does not incorporate the large negative externalities associated with runs on financial institutions, including MMFs. But one notable concern, given the similarity of MMF portfolios, is that a preemptive run on one fund might cause investors in other funds to reassess whether risks in their funds are indeed vanishingly small.

Example of the above: the S&P downgrade of the US which was supposed to drive investors out of bonds (and into stocks), had precisely the opposite effect.

But more importantly, now that the Fed has explicitly said in no uncertain terms that gating bonds funds will likely result in a loss of "financial stability", the next time there is a mandated market crash originating from either a bond run, or wholesale liquidity extraction panic, the world will know just who the guilty party is: the Fed.

This would be similar to something like Florida State leading Alabama in a national Championship game and the refs changing the rules at their whim to give Bama a victory. (I love Bama, so don't take this as a slam - just using two great teams as an expample). This is as bad as changing the definition of default last year when the Greeks defaulted and no one wanted to pay out on CDS and start the implosion.

You know the shit is fucked up when they do unnatural shit to prop something up and then change the rules to keep it going. Yay! The goverment always speaks the truth, don't they? And Central Planners always fix things, don't they? I guess neither of them has heard about or understand the laws of nature...

This fed proposal for lock ups and exit fees for bond funds has the sole purpose of making sure that the U.S. dual citizen oligarchs get out of bond funds now while they still can. The NY Fed's piece is just reinforcement of the message, namely that the Fed is ready to take bonds lower in price, higher in yield.

I agree, they are preparing for the eventual interest rate increase. Once rates go up which they have to eventually to normalize the system, bonds are going to get annihilated. Being an optimist (gets harder every day), I think they want to avoid everyone from getting destroyed in bonds when they do increase rates. However, they can't get people out of the way of the cement roller, austin powers style, people just wont move. So they want bond investors to move out of the way or be more likely to wait out a crash in bonds. All the while, stocks will go down when interest rates are raised, but they go down less because some bond money is now in the stock market to cushion the blow by adding liquidity. I think that's the attempt at least by the fed and if that were their intention, then it does at least try to meet their financial stability job.

They are just trying to undo what fuk face bernanke did when he doubled quantitative easing to 85 billion. He went rogue and his ego got in the way of rational thinking, because QE wasn't working and he wanted to go all in, it works or he dies trying mentality. Deep down that asshole knows you stimulate hard at the beginning of a crisis then let off the gas, you don't do it 4 years out.

Perhaps, perhaps not, but if it does, the sheep will likely turn on the closest representatives of the bankers first. While I wouldn't lose any sleep over the nearest BofA, WF, big megabank branch being burned down, I suspect that angry sheep might try to make sure that the tellers and branch managers are inside when it burns. These are people who, while part of a corrupt system, likely don't even comprehend that they are part of a corrupt system.

Predators (smart, strong, fast, dilligent, cunning and organized) beat and eat the prey (dumb, weak, slow, lazy, naive and disorganized). Even if outnumbered. I feel sorry for you (but not too much), if the Bible or mamby-pamby Sunday School didn't teach you the real facts of life, or Mother Nature's laws. Which have been true for the last Billion years.

I think the real takeaway here is whether ZHers have learned anything to front-run the Fed. And I don't mean the way many got burned by buying PM on the way up, during QE front-running (Summer-Fall 2012).

The question is: (a) is ZH right about the Feds' motives and intent, and (b) if we do try to front-run the Fed again, will we be safer this time?

This is not the time to bitch & moan like an under-tipped whore. It's time to stand up and be counted, I'd say.

If they're trying cause one, they will announce with a bullhorn that they're considering closing and locking the gates, just not yet. But "oooh!" are they seriously considering it. MSM yackity-yack heads will debate the possible effects of shutting the gates ... papers are issued debating this or that aspect of closing the gates. They may even actually, at some point, lock the gates after the horses are gone.

If they're trying to prevent a run, you wake up one morning to find the gates locked. No warning, no MSM yackity-yack.

So, intentionally crush the price of american bonds/treasuries? Well, that certainly would make it easy for the Fed (and primary dealers) to buy the remaining debt "market" with regard to american paper. The U.S.S.A. would then trully be 100% owned by a group of individuals the taxpayer has paid to coin their on money by printing that money out of thin air. Fucking genius (and still not one head has been taken, fucking amazing).

The Fed is and has always been about maintaining power and control over real resources (including the human resources). It's about ownership, period.

back in the day when this was country didn't cater to banksters (some 120+ years ago), the actions of the federal reserve would be seen as treason - they provide treasury collateral for large banks to short the bonds of our own country.

think about this for a second. they provide treasuries to banks who are allowed to go ahead and short the bonds of the country that always bails them out.

this NY FED study bought to you by the nice people from the NY FED Macro Research department, located between the "destroy the middle class department" and the Goldman Sachs adoration shrine.

Madbraz - Excellent point, a private entity being allowed to continue this way is treason but the treason comes from Congress that is not revoking it's charter.

That is the evil genius of the private Central Bank system. It's government is subjected to state capture until your profits are milked dry and you become the new commie police state like America has morphed into and like the Soviets.

Meanwhile, they choose a new host, a former commie police state like China. See all the press about China cleaning up corruption and jailing bankers there?

Revolutions against these modern conquistadors are financed and manipulated by other governments also owned by Central Banks and tge head of all of them is BIS in Switzerland. Note how well Switzerland has been run for centuries? The eternal tax haven so it never gets attacked.

The world has been infected by termites. The conquest is complete. What is the only option to a termite infested house? It will burn, it is inevtiable that one nation with even a few nukes will get sick of this shit and use them which even one going off will collapse all markets overnight. That is why I hedge for three month basics and some tradeables and what I think will happen.

"The issue which has swept down the centuries
and which will have to be fought sooner or later
is the people versus the banks." - Lord Acton (google him, was a major banker himself).

I dont think we'll be full Soviet though. The model's profitability is low compared to collapse and restructure. Of course that can take a decade or more to play out after initial events like 2008. Britain and America were fascists in the 1930's but it doesnt seem they were hollowed out (especially America) at this scale.

intentionally crush the price of american bonds/treasuries? Well, that certainly would make it easy for the Fed (and primary dealers) to buy the remaining debt "market" with regard to american paper. The U.S.S.A. would then trully be 100% owned by a group of individuals...

HEY!

This reminds me of this fable I heard!

One time long ago there was this banker who had a spy and a magic horse and there was this big war that was decided by one big battle - WaterLoo or Watership Down it was called.

Well the short guy lost and the magic horse and rider FLEW back to London with this intel and the banker faked out everybody by selling the bonds of the winning army!

Everybody panicked and dumped their bonds as well - then the banker had his agents buy all those bonds for PENNIES on the pound!

At this point he and his family, or House, became supreme as they owned all the bonds and thus owned the government!

The central banks have used 29 TRILLION dollars printed out of thin air to buy up the stock markets all unaccountable and off balance sheet of course. The central banks effectively now own half of EVERYTHING and it cost absolutely nothing. And, you must now ask yourself if this is true then what is the money now worth? NOTHING.

The smart sheep did not fall for it and buy into this constant market levitation leaving them stuck without enough non central bank buyers to unload. So now they are blocking all the exits. Money market check. Gold, check. Now the bond markets. They are going to try to force you to buy into this overpriced criminal stock market.

This has to be the biggest fraud of the entire history of the world. FUCK YOUR STOCKS SHOVE THEM UP YOUR ASS.

Centerline - The rotation has been into China and soon Russia. Back to the gold standard as Western nations and Japan default.

CB's returning to a gold standard is a feature not a bug, lasts 40 years of a model. Second half of 40 years liquidity standard. I don't own bonds but if I am taking the really long view, I would buy Chinese bonds because that is what CB's are doing compelling you to invest East (and yes US stock market to a lesser degree).

The risk to bond investing in China is a nation goes full retard and ignores MAD thinking (true or not) that they become the next Saddam causing domino effect.

Regarding that "29 TRILLION" figure, have you actually seen the report? That figure looks like it was taken grossly out of context, seeing that the report includes sovereign wealth fund and public pension fund investments. I'd be keen to hear from someone who actually has a copy, and could tell us what portion of that figure is actually held, directly or indirectly, by central banks, and was purchased via pure fiat issuance.

I am not going to do his research for him because he is to damned lazy. the information is out there all over. IT was reported in FT and right here in fact. He does not want to believe it anyway. It does not matter at this point anyway. IT's OVER. The only thing left now is to try to survive this mess.

I could just as logically ask you to do your homework, since what the FT actually says is,

"says a report to be published this week by the Official Monetary and Financial Institutions Forum (Omfif)... The report, seen by the Financial Times, identifies $29.1tn in market investments, including gold, held by 400 public sector institutions in 162 countries."

In regards to the CB balance sheets, there is also a distinction that needs to be made between investing the product of a trade surplus versus investing the product of a printing press, which is more difficult when the CBs in more productive economies are pulling the same shit as the ESF assclowns of the Eccles buildings (or whatever they morphed into in the digital age when the ESF was no longer big enough). To wit (from the same FT article) "China’s State Administration of Foreign Exchange has become “the world’s largest public sector holder of equities”, according to officials quoted by Omfif. Safe, which manages $3.9tn, is part of the People’s Bank of China"

Or to pull quotes straight from OMFIF

The report, focusing on investments by 157 central banks, 156 public pension funds and 87 sovereign funds, underlines growing similarities among different categories of public entities owning assets equivalent to 40% of world output... The assets of the overall survey of 400 Global Public Investors comprise $13.2tn (including gold) at central banks, $9.4tn at public pension funds and $6.5tn at sovereign wealth funds.

The $29T figure was taken grossly out of context. Excluding gold it's less than $12T. Moreover without getting into specific line items (such as SAFE) there are huge (undiscussed) implications for the continuation USD hegemony..

Central Banks (who have access to printing presses) getting into equities is problematic, but there is a significant difference between public and private Central Banks owning 1/2 vs 1/6 of global equities (once they get to 1/2 it would be too late).

Again with the strawmen, where did I ever suggest anything like buying equities??? It's like you really don't understand what's going on, much less the implications.

An intellectual game would be debating the ethics of central banks as activist investors (a continuation of a long running debate in the SWF community), because CBs already are political and warfare tools of the State.

BTW since research to identify facts doesn't appear to be your strong point- the 29.1 trillion is in "market investments", not just equities (and gold).

Just looking at the 13T of "market investments" that central banks hold - this includes both commercial debt and derivatives.

Debt and assets (equity and gold) are relatively straightforward, but a derivative "market investments" is simply a wager between two parties, and with the vast majority of outstanding derivatives being interest rate derivatives (and thus potentially under the direct control of one of the parties) there are very serious policy implications to the move by central banks away from a traditional portfolio composition of sovereign debt and gold, as well as for the banks that act as counter parties or proxies (who then have inside information).

Public assets are going to go out with a bang. Private assets is the only game left. When I said that the student loan bubble was the last bubble, I should have clarified that in terms of debt (perhaps I did... don't recall). The equities bubble is going to one to behold when the sovereign debt chain of counterparty exposure begins to collapse.

In the interim, this is a game of musical chairs and the Fed has the advantage.

Why are you so pretentiously offended by a simple information request? Truth be told, it would be scandalous if but 1/100 of the stated amount has been 'printed out of thin air' by the Fed and invested in equities in an undisclosed manner. However, without the report, we don't know which central banks, in which countries, have done this, or what enterprises (possibly state-owned to begin with) the funds were transferred to, if any. And sorry I don't have access to a Bloomberg terminal, or 350 pounds to blow on a report that may or may not break out those figures. Cracks me up when people cite sources they've never even seen. The story would be bigger than Snowden if it's going down the way you agitprop it.

"The goys must be forced into the Market, by any means possible. Then we will Short and Crash it. What difference does it make, at this point? They are animals bred to our subservience! We will degrade their women, force upon them Miscegenation, control their information and grind them into the dirt they came from.

Free markets are becoming less free every passing day. It doesn't matter where the funds are allocated, they will all be locked down at the appropriate time. The central planners better be careful with what they wish for, if they get too clever money may end up moving some place detrimental to the system.

If what denominates all prices is out of the hands of real market participants, if the value of the denominator is arbitrary, then you can't ever have a free market. I don't know why everyone succumbs to nostalgia for what has ever been a faerie tale, that markets were free at one time. They never have been.

We've never had free markets. Whether or not it is capitalism depends on your definition of capitalism. I notice quite a few people using the term "crony capitalism". If we are splitters in that fashion then it can be a genre of perverted capitalism. Personally, I prefer mercantilism rather than crony capitalism. Real, free market, free enterprise capitalism is laissez faire, a level playing field for competition and no government interventionist, elitism, granting monopolies and regulatory or otherwise picking favorites.

This is what makes the case for gold compelling. Real physical Gold has no liabilities or secondary debt instraments attached to it. That is the real value of gold. If one chooses to not play their game then Gold is one of the few assets that provides a safe haven away from the coming turmoil.

Tell that to my friend who had his pool cleaned and inadvertantly exposed his gold coin collection while cutting a check for the pool service.

Pool guy came back and murdered friend to steal the gold.

Be careful. You might have pm, but, when the neighbors find out....when you try to exchange Au for services they will hunt you down and kill you for your gold.
The pool guy murdering gold the if wsst apprehended and rode ol' sparky in the State Pen in Richmond, VA.

That gold didn't help my friend. One chance moment cost him his life and this was in the 1970s when gold was under $100/oz.

They will stop at nothing to steal your gold. Catch 22. You have gold, but, you dare not try and spend it cause the mob will be on you and you will perish and the cycle will continue. Ask the German Jews if it helped them.

I keep a .45 Army Colt within reach At All Times. That's only to get to my shotgun and/or AK-47. I keep 10 weapons stashed all around the house. I fought in Indochina in a special group; old habits die hard. I am an old man, now, but I love America and I will defend her People.

I've become convinced that they never really were free, they were simply allowed to work a certain way for a period of time until that way was deemed unprofitable to a certain group. Thus the way must change when it is no longer of use.

The markets were always manipulated to some extent, for example Reagan's working group on financial markets introduced the PPT, but they have never been manipulated to this extent. The fed is practically guaranteeing positive returns.

Freedom is like pornography in that its hard to define but you know it when you see it. Or in our case, when you lose it. Freedom carries consequence which is what more and more people are seeking to escape. This is not the freedom they are looking for.

"I am the Tyrant; I have blatantly destroyed criminal evidence in the open, for everyone to see. The eroticism of watching a State Department Ambassador Raped and murdered in real time was like sweet Nectar from the hash factories of Lebanon!

You saps will do Nothing. You watch me Destroy you in Plain Sight and do not resist! Your vaunted Military Oath Keepers are nothing but feeble women. I will destroy you and you will beg for Death! Your Military Leaders are cum dumpsters for my Mujaheddin!

When I order you put up against the wall and shot, you will exclaim, "Long Live Bath House."Hahahahahahhaha!"

Since the NSA can't retrieve the e-mails, I wonder if the FSB can....assuming Russia has a Freedom of Information Act? I bet they just might release any info they had just to further discredit our current regime....

Why not? The "concensus" of investors (aided by the market manipulating primary stealers) have been taught that it is best to never cross the fed. It pays to be a lemming. No room for logic in this market where there is only a once per decade john paulson type payoff.

Short of printing more money to purchase from themselves, they have no way out of their 'Belgium' stock purchases. They need new 'customers' to prop up their ongoing Ponzi scheme. I suspect they have called in Madoff and Corzine as consultants.

"since those trillions in bond funds have to be allocated somewhere, where will they go but... stock funds."

Also Govie Bond funds...

It's not obvious that the money would pile into Equities. And since the circular HY / Buyback / Dividend shift has been one of the drivers in Equity valuations, wouldn't crushing the Corporate market and driving spreads wider hammer Equities too?

Maybe this is Part 2 of the Taper, repairing some of the damage created by the QE monster.

Absolutely. The rent (corp-gov spread) is too damn low! Mostly, though, they don't want money just sitting in bonds for the next decade. They want trading volume, spending, velocity, and all the rest. They know damn well the eCONoME is in the toilet.